In this article, we compare the difference between an HDB loan and a bank loan so you can make a better, more informed choice. Let’s get started!
Update: This article has been updated to reflect the latest changes in the Loan-to-Value limit for HDB loans, effective 30 Sep 2022.
HDB Loan Vs Bank Loan: An Overview
Both the HDB Concessionary Loan (better known as the HDB housing loan) and bank loans have a list of advantages and drawbacks but, as with almost anything home loan-related, what worked out for someone else, might not work for your situation. Here’s an overview of their main differences.
*Interest rates updated as of 30 September 2022. Throughout the article, we will be referencing these rates for bank loans. For the latest rates, you may check PropertyGuru Finance.
Now, before we go further, you’ll need to first ask yourself: which housing loans are you eligible for?
HDB Loan Vs Bank Loan: Eligibility Criteria
Sometimes, you may not have a choice on which of the two loan types to take. As you may have noticed, if you are looking to finance a private property (i.e. condo or landed home), then you are not eligible for HDB housing loans. Your only option is to go with a bank loan.
If you’re buying an HDB flat, be it a new or resale flat, hurray! You may be eligible for an HDB housing loan.
HDB Loan Eligibility
We use ‘may’ because the HDB loan eligibility criteria are quite stringent. Here, have a look:
At least 1 buyer is a Singapore Citizen
Past home loan and/or ownership
Have not previously taken two or more HDB housing loans and have only taken one HDB housing loan and the last property you owned wasn’t a private residence (local or overseas) such as: HUDC flat, property acquired by gift, property inherited as a beneficiary under a will or as a result of the Intestate Succession Act, property owned/ acquired/ disposed of through nominees
Must not exceed $14,000 for families, $21,000 for extended families, and $7,000 for singles buying a 5-room or smaller resale flat or a 2-room new flat in a non-mature estate, under the Single Singapore Citizen (SSC) Scheme
You don’t own any other property locally or overseas and haven’t disposed of any within the last 30 months prior to applying for your HDB Loan Eligibility letter. You also don’t own more than 1 market/hawker stall or commercial/industrial property. If you do own one of these, you must be operating your business there and have no other sources of income
The eligibility criteria for a bank loan aren’t as stringent as HDB’s. Each bank has its own method of assessment, but generally, as long as you are in good financial health and have a good credit score, you’re good.
If you’re not sure what the bank loan criteria are or which bank to approach, you can approach one of our friendly Mortgage Experts for help.
For Both HDB and Bank Loans, TDSR and MSR (for HDB Flats) Will Apply
Whichever you pick, all home buyers will also be restricted by the TDSR. The new property cooling measures saw the TDSR revised from 60% to 55%. Basically, how much you can borrow will be limited by your monthly repayments, which cannot exceed 55% of your monthly income.
The TDSR is a restriction for all your liabilities (so not just your mortgage), which means that if you’re already servicing multiple loans, you might not be able to take out a housing loan (or may have to loan less).
There will also be an 0.5% increase in the interest rate floor used for TDSR and MSR computation from 30 September 2022. For bank loans, the medium-term interest rate will be revised from 3.5% to 4% (or 5% for non-residential property purchase loans and mortgage equity withdrawal loans). For HDB loans, it is 3%.
Mortgage Servicing Ratio (MSR): For HDB Properties Only, Including EC
If you’re buying an HDB property (including executive condominiums), you will also be restricted by the MSR which states that your monthly repayments for a mortgage cannot exceed 30% of a borrower and/or joint borrower’s monthly income.
The above-mentioned increase in interest floor rates from 30 September 2022 will apply as well.
Now that we’re all clear on the loan eligibility and government restrictions, let’s get down to comparing the HDB housing loan and bank loans.
HDB Loan Vs Bank Loan: The Key Differences
Assuming you’re eligible for both the HDB housing loan and bank loans, here are the key differences between the two.
1. Bank Loans Have a Tighter LTV, but Borrowing Less Also Means More Savings in the Long Run
HDB Housing Loan LTV: Up to 80%
Previously, the HDB housing loan could cover up to 90% of the purchase price for new flats, and the lower of either the resale price or market value for resale flats. However, the new September 2022 Singapore property cooling measures saw the LTV for HDB-granted loans being adjusted to 80%, reducing the maximum amount future homebuyers can borrow from HDB.
Still, having the LTV set at 80% means you can borrow more than if you take a bank loan. Although it may seem like a good thing that you can borrow more funds, getting a bigger loan could mean you end up paying more interest in total.
Also, do note that the 80% limit is subject to CPF balances. HDB requires each lessee’s CPF Ordinary Account (OA) balances to be wiped out (except for a maximum amount of S$20,000). This means that if you have a substantial CPF balance, you may not be able to obtain an 80% LTV loan. This isn’t the case for bank loans.
Bank Loan LTV: Up to 75%
In contrast, bank loans cover only up to 75% of the purchase price. This 5% difference means a larger downpayment is required, and that can put a real dent in your finances, especially if you are tight on cash and/or CPF savings.
2. Bank Loans Require a Higher Downpayment, Which Can Be Difficult for Cash Flow
As seen in the previous section, HDB allows you to borrow more than banks. This, in turn, would also mean a more manageable downpayment of 20% (as opposed to 25%).
With both HDB and bank loans, you can make use of your CPF OA savings to service the downpayment. However, there is a difference in how much you can use in the longer term, and hence, how much cash you’ll have to pay upfront.
HDB Housing Loan Downpayment: Minimum 20%, Can Be Fully Paid with CPF OA
Assuming a direct purchase, when you take out an HDB housing loan, the minimum downpayment is 20%, which you can pay off fully with your CPF if you have enough savings in your Ordinary Account. This means you may not need to fork out a single cent (for your downpayment at least).
Bank Loan Downpayment: Minimum 25%, of Which 5% Must Be in Cash
Bank loans require a significantly higher downpayment of 25%. Of that, at least 5% needs to be made in cash, while the remaining 20% can come from housing grants or your CPF.
You can also use the CPF housing usage calculator to calculate how much of their CPF you can use for your property purchase. We also recommend our affordability calculator to see how much your downpayment, monthly instalment and length of loan tenure is, among other factors.
Estimate what you can comfortably spend on your new home
Generally, the HDB housing loan usually requires less cash downpayment upfront, which is preferable for those with limited cash savings and/or cash flow issues, like many young couples buying their first BTO.
That said, always remember that while HDB housing loans require less upfront, they can be more expensive overall, especially if you take a bigger loan to reduce your downpayment. Bank loans require a higher downpayment but may offer more potential cost savings if you can afford the upfront cost.
3. HDB Housing Loan Interest Rates Are More Stable
HDB’s interest rates haven’t changed in over two decades, which may be preferable for the risk-averse. Conversely, bank home loan interest rates are more volatile, which is more suitable for those with a bigger risk appetite.
HDB Loan Interest Rate: 2.6%, Hasn’t Changed Since 1999
The HDB loan interest rate is pegged at +0.1% of the prevailing Central Provident Fund Ordinary Account rate. The CPF rate, in turn, is based on the average interest rate offered by the major local banks over a three-month period or a minimum of 2.5%, whichever is higher.
As of the time of writing, the interest rate for HDB loans is 2.6% p.a. This rate is comparable to what most banks offer, and hasn’t changed since July 1999.
Bank Loan Interest Rates Are More Volatile
Banks offer two types of loans: floating rate packages and fixed rate packages. Floating rate packages are pegged to a benchmark interest rate, with a spread that’s fixed for the lock-in period. Floating rates are more volatile as they fluctuate with the benchmark rate, usually according to market conditions.
Fixed-rate packages, on the other hand, guarantee you a certain rate for an agreed lock-in period. Although fixed rates are more stable, you’ll only be guaranteed the same interest rate for a few years (3 to 5 years at most). Due to this relative stability, fixed rates are often offered at a premium compared to variable rate packages. After the lock-in period, your interest rate will depend on the whims of the market (read: it usually goes up!).
Given that monthly payments are predictable, a fixed rate may enable better planning. A floating rate package, however, may allow borrowers to capitalise on cheaper mortgage rates when the market is down. The flexibility of floating rate packages also typically allow borrowers to refinance sooner and/or make partial payments.
Currently, the lowest floating rate is 2.62% while the lowest fixed rate is 2.98% (as of 30 September 2022). Although the current bank mortgage rates are higher than HDB’s, they are pegged to the market, which means if rates crash again, you may benefit from greater cost savings. That said, the reverse is also true, so if rates continue to rise, you will pay more.
Banks also can and sometimes do adjust their fixed rate loan packages too. For example, with the most recent rate hike, many banks removed their fixed rate packages. So, if you find a fixed rate package with a good rate, you might want to seriously consider it.
Automatically track your home loan against daily market rates.
4. You Can Refinance From an HDB Loan to a Bank Loan, but Not the Other Way Around
If, after a few years, you decide you want to switch from an HDB housing loan to a bank loan for lower interest rates, you can do so. However, the reverse is not possible.
If you opt for a bank loan, you are automatically disqualified from switching (or switching back) to an HDB housing loan. Instead, after your lock-in period, you will have to either reprice with a new package from the same bank or refinance with another bank. For example, after a 3-year home loan with DBS, you will need to decide if you want to negotiate for a new DBS home loan or look for other banks (like OCBC, UOB, etc) to loan from.
If you’re currently on a bank loan and are puzzled by the concept of refinancing to actively manage your home loan, feel free to reach out to PropertyGuru Finance’s mortgage experts for some free advice and guidance.
5. There Are Higher Penalties When It Comes to Bank Loans
With tenures spanning several decades, a home loan is a long-term commitment. As such, it’s important to consider your future plans at each stage of your decision-making.
Generally, HDB loans are more flexible in that there is a lot more wriggle room for changes in your financial situation. If you stumble onto a windfall (maybe you struck 4D?), you can pay off however much you want without penalty. If, after a few years, you decide you want to switch to a bank loan for lower interest rates, you can do so as well.
If you run into financial difficulties (choy!), there is a late repayment fee of 7.5% p.a. (on the amount that is late, not the full loan), but you can appeal your case. HDB is known to be more lenient than banks.
For bank loans, there is usually a penalty of 1.5% to 1.75% if you decide to make early repayments within the lock-in period to reduce your loan size. Banks’ late repayment fees differ from bank to bank and are much harder to get waived or reduced.
In the event of a default in mortgage payments, banks may explore debt consolidation plans/restructuring programmes with you to help improve your situation. If nothing can be done, the bank has the right to repossess the property and put it up for a mortgagee sale (auction) as a last resort to recover whatever you owe.
HDB Loan Vs Bank Loan: Which Should You Pick?
If you’ve gotten this far and are still on the fence, here’s one last question to ask: are you motivated by cost savings, or are you the kind who won’t mind paying a little more to avoid the hassle? This may influence whether an HDB or bank loan is more suitable for you.
HDB’s stable 2.6% interest rate makes long-term planning easier. Plus, you can pay a smaller downpayment. If, after several years, your finances improve and you want to switch to a bank loan, you are free to do so.
Typically, homebuyers go for a bank loan when they find more competitive interest rates. However, as mentioned, to enjoy this, you must first make sure you can afford the minimum 25% downpayment. But as interest rates rise, it’s important to consider how this will affect your monthly mortgage payments in the long run too.
Ultimately, there is no right or wrong here: While some customers see taking an active interest in their loan as a small price to pay for the potential savings that can be made by refinancing, others may prefer the lower maintenance of the HDB loan.
Disclaimer: Information provided on this website is general in nature and does not constitute financial advice.
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Bank loans can be cheaper as their interest rates are generally lower than HDB’s interest rate which is pegged at 2.6%. However, taking up a bank loan requires you to fork out more cash upfront for your downpayment.
No. Unlike the flexibility that HDB loans offer for you to switch to a bank loan, the same does not apply in the reverse. If you are thinking of refinancing, you may do so by taking up another loan with another bank.
Yes, you can use up to 120% of the Valuation Limit (VL) of your house with your CPF to finance your bank loan.
You will first need to apply for a Home Loan Eligibility (HLE) letter. This can be done via the HDB website.
You would have to take note of the citizenship, household status, monthly household income ceiling, ownership and the remaining lease of the flat. If you meet all of these criteria, you are most likely eligible for an HDB loan.